Forex traders use many types of technical indicators, most of which are readily available in trading platforms to analyze and determine the currency price movements. Some of the most popular indicators include oscillators, Relative Strength Index (RSI), Parabolic SAR, Fibonacci, etc. These indicators help identify overbought and oversold price key levels, among other trends.
Other indicators besides the above indicators that identify price key levels fall under the category of volume indicators that help determine the trends that most traders support. Some of the most popular volume indicators include accumulation and distribution indicator and volume, money, flow index indicator. Below is a look at the accumulation and distribution indicator.
What Is Accumulation And Distribution Indicator?
The accumulation/distribution (A/D), developed by Mark Chaikin, who also created the Chaikin Oscillator trading indicator, is a volume-based indicator popular with many forex traders. Even though it works best when paired with other management tools, A/D is helpful on its own to assess cumulative money inflow and outflow.
With the indicator, you can interpret reversals and trends better while at the same time gaining more insights into the behavior of the currency market. The indicator also helps the currency volume and price to determine whether the market is distributing or accumulating.
The indicator appears as an upwards or downwards moving line mainly when applied in trading platforms such as MetaTrader. The concept behind A/D is easy and is very similar to the Dow Theory. When the asset price is on the rise, the A/D also goes up.
Many of the forex traders and investors will want to buy because it confirms there is an uptrend. If the A/D line falls, it indicates a downtrend and the price lower than its range.
A downtrend is also an indication of negative volume. Forex traders using the A/D indicator also watch out for divergence in the currency market. If the price rises while the A/D falls, this could indicate the prices reversing, which could spell trouble for the traders. Likewise, if the price trends lower while A/D rises, it could mean prices are getting higher soon.
Mistakes to Avoid When Using the Accumulative and Distribution Indicator
If you are using the A/D indicator, one way to avoid making losses is by not going with what the trends show you. If the market vigorously moves upwards and stays in the same position for some time, do not rush to buy. Instead, wait for it to pull back and retrace downwards against the trend, then buy.
Suppose the trend is strong but moving downwards, bearish trade indicators once the price retraces upwards against the trend. If you follow this trading trend strategy, you will save yourself from incurring heavy losses, mainly when the market exhibits strong trends.
Pros, Cons of Accumulative, and Distribution Indicator
- A/D indicator is readily available in all the major forex trading platforms such as MetaTrader 4, MetaTrader 5, trading view, and PPRo8
- It is one of the most straightforward volume indicators to use and understand even for novice forex traders
- Traders use the A/Indicator to monitor and gauge the overall flow of money. When the A/D indicator moves higher than the ranges, it is an indication of prevailing buying pressure. When it impacts the opposite side or downwards, it indicates an increased signal raising the selling pressure.
- Traders also use the A/D indicator to confirm a recent move’s strength and longevity
- The signals of the indicator take time to form, making it inappropriate to use for forex day traders
- The indicator has a lagging nature, which makes it hard to send buy and exit signals
- It does not consider trading gaps and therefore does not indicate when they show up. For example, if the currency price rises upwards to end in the middle of the trend, the A/D indicator ignores the gap. The reason for this is that the indicator uses closing prices to form.
If you use the accumulative and distribution indicator as one of your trading strategies, the recommendation would be to study and learn it to avoid any disappointments. Otherwise, the indicator is a popular technical indicator that is easy to use and calculate to identify and analyze the market trends.